Taxing Question

CFA Level III
#1

Suppose:

R(After Tax Real Ret.) = 5%

i = 3%

Tax rate = 30%

Therefore

R(After Tax- Nominal) = 5+3 = 8%

R(Before Tax Real Ret.) = 5 / 0.7 = 7.14%

All fine till here

Now…

What would before Tax Noiminal Ret. be?

A) Before tax Real Ret. + Inflation = 7.14 + 3 = 10.14%

OR

B) After tax Nominal Return / T = 8% / 0.7 = 11.42%

I saw one place used B) … But I beg to differ (Reason: There is no tax on infation) … Please assist…

#2

(1.03 x 1.05)-1 = 8.15%/70% = 11.64%

There definitely is tax on inflation

#3

remember your Level II - Emerging Market chapter - where you did Taxes on the NOMINAL side of things - never on the Real Side. For the real - it was always NOMINAL Tax/ (1+Infl).

#4

The issue can be explained that…which returns that can be taxed? Norminal or real ?

The answer is nominal return.